Earnings of India Inc remained under pressure in the past few quarters due to unexpected collapse of commodity prices (metals, oil & gas, coal) and subsequent slowdown in exports demand.
With the onset of the new financial year, investors are waiting for corporate results for quarter ended March 31, 2016, which can give direction to the market. After almost five consecutive quarters of decline or flattish trend in headline aggregate net profit of Sensex companies, the trend is expected to improve in Q4 in spite of the continued stress in core sectors like, metals, capital goods, oil and gas along with the effect of regulatory directive driven clean-up of balance sheets for earnings of banks.
Earnings of India Inc remained under pressure in the past few quarters due to unexpected collapse of commodity prices (metals, oil & gas, coal) and subsequent slowdown in exports demand. Two consecutive years of drought and a slower-than-expected revival in the domestic economy also affected corporate earnings.
According to Sharekhan, India will see 7.3 per cent earnings growth in Q4. The domestic demand environment is expected to improve considerably with better monsoons, Seventh Pay Commission salary hikes and higher capital and rural spending by the government. Consequently, FY2017 could well turn out to be a turnaround year for corporate earnings.
Sharekhan in a research note further said, “The earnings growth in pharma, IT services and auto will lead other sectors. On the other hand, stress continues to be visible in metals, oil & gas and capital goods sectors where growth is estimated to be negative in Q4 also.”
Below are five stocks on which you can bet on ahead of the quarterly results to be announced by India Inc.
Recommended By: Kotak Institutional Equities
Investment Rationale: Kotak sees a slightly soft but steady 10-11 per cent growth for Indian IT in FY2017. The brokerage house estimates a sequential revenue growth of 2.2 per cent in constant currency (c/c) and 1.9 per cent in dollar terms for Infosys. Growth will be led by BFSI and retail verticals and the US. Ebit margin will decline by 30 bps due to absence of write-back of provisions that aided margins in the December quarter and pricing pressure in new projects although it would be offset by gains from rupee depreciation.
Kotak expects solid progress in client metrics, robust total contract value (TCVs) and acceleration of growth in Infrastructure Management Services and expects FY2017e guidance of 11-13 per cent c/c revenue growth with 24-26 per cent Ebit margin band.
Kotak has ‘Add’ rating on Infosys shares with a target price of Rs 1,300. The scrip was trading at Rs 1,167.35 on April 8.
Recommended By: UBS
Investment Rationale: DLF’s consistent increase in net debt over the last few years, weak pre-sales, and negative operational cash flow from the development business have led to concern among investors. However, UBS believe pressures will ease materially over the medium term from strong rental income growth, improved cash flow from land or project sales, and management’s efforts to infuse a large part of the proceeds from the co-founders’ rental asset stake sale in DLF.
UBS is bullish on DLF shares. It said, DLF shares are trading below their 10-year historical P/BV and at a discount to NAV trends, underlining the market’s strong scepticism.
3) Indraprastha Gas
Recommended By: Jefferies
Investment Rationale: Jefferies expects stronger volume growth for Indraprastha Gas (IGL) in Q4 due to pick-up in both CNG (aided by 15 days of odd-even restriction in January from which CNG cars were exempted and greater adoption of CNG by Ola/Uber cabs based on Supreme Court order) and PNG (on account of Rasgas renegotiation which should lead to some revival in industrial segment) volumes. While Jeffereis sees a sequential margin contraction in Q4, the recent gas price cut should lead to a margin expansion in Q1—IGL has cut CNG price by Rs 0.6 per kg against estimates of Rs 2.5-3 per kg. The brokerage house has a ‘Buy’ ratings on IGL.
4) Bharti Airtel
Recommended By: JM Financial
Investment Rationale: Bharti Airtel, country’s largest telecom operator, on Friday announced the acquisition of 20 MHz spectrum in 8 circles from Aircel for Rs 3,500 crore. Bharti will acquire spectrum or radiowaves in 2,300 MHz band in Tamil Nadu, Bihar, West Bengal, Jammu and Kashmir, Assam, North East, Andhra Pradesh and Odisha, the company said in a statement.
According to JM Financial, with this purchase, Bharti’s aggregate spectrum holding (2G+3G+4G) would increase to 679 MHz, which is 40 per cent higher than spectrum held by Jio currently (Jio would be able to reduce the gap post 850 acquisition via trading/sharing). JM Financial has ‘Buy’ rating on Bharti Airtel shares with a target price of Rs 415.
5) HDFC Bank
Recommended By: Angel Broking
Investment Rationale: HDFC Bank’s capital adequacy ratio as of December 2015 (3QFY2016) stood strong at 15.9 per cent, with tier-1 ratio at 13.2 per cent, which positions the bank to continue on its growth path and increase its market share. The bank has been able to maintain its asset quality consistently. Asset quality continued to remain healthy with the Gross NPA ratio and the Net NPA ratio at 0.97 per cent and 0.29 per cent, respectively, as of 3QFY2016, in a challenging macro environment.
According to Angel Broking, credit and deposit growth beat the industry growth rate, driven by strong retail business, healthy CASA and continued network expansion. This provides strong visibility for a robust 20 per cent earnings trajectory, coupled with high quality of earnings. The brokerage house has a ‘Buy’ rating on the stock, with a target price of Rs 1,262.